Guy Hands: Smaller firms to hark back to captive era

If you are not one of the industry’s large diversified asset managers, then you will have ‘to give up some independence’ and get close to your investors, the Terra Firma boss told delegates in Geneva.

Smaller private equity firms will return to something akin to a “semi-captive” model, as the industry continues to bifurcate over the next decade, said Guy Hands, founder of Terra Firma, on Thursday.

Hands was addressing delegates at European industry association Invest Europe's annual investor forum in Geneva alongside Justin King, the former supermarket boss who joined Terra Firma last year as vice chairman and head of portfolio businesses.

In response to a question about the shape of the industry over the next 10 years, Hands described a continued divergence between mega firms – which “will be able to keep their independence and indeed will become large independent public asset managers” – and smaller firms, which will need to “give up some of their independence”.

When asked whether this was a clue specifically as to the future of his firm, which falls into the latter category, Hands declined to comment further.
Those at the large end of the industry will provide investors with “beta”, said Hands, while smaller firms will continue to “create alpha with greater volatility”. 

“Although everyone hated the captive model [of private equity firms owned by their cornerstone investor],” said Hands, “smaller firms are going to need to be close to somewhere between five and 20 LPs who are important to them”. This contrasts with the mega firms, for whom “no investor will be significant”, he continued. Terra Firma currently has around 250 investors in its existing funds.

As well as being chairman and chief investment officer of the firm he founded, Hands is currently acting chief executive, with former CEO Tim Pryce having stepped back from the role earlier this month. Pryce, who has been with the firm since its inception, remains part of the business as a managing director and member of the firm's management committee.  

The firm is currently running a search for the CEO position as well as “a number of senior roles in the business”, according to a statement. In related news, Christen Thomson, who joined the firm as director of communications around 12 months ago, has also left the firm.

Having not raised a traditional private equity fund since 2007, Terra Firma has settled on an investment model in which the firm contributes at least 10 percent of the equity to each deal done or fund raised. The firm has balance sheet equity of over €1 billion and in “recent years” the firm has had investors pledge money of more than €2 billion available to invest, Hands told Private Equity International , but has thus far held back from investing on account of high asset prices.